Malaysia's Inland Revenue Board published new Transfer Pricing Guidelines for Intra-Group Loans, setting out how taxpayers should apply the arm's length principle to related-party financing, including the characterisation of debt and equity, pricing methodologies, documentation requirements and compliance obligations.
Malaysia’s Inland Revenue Board (IRBM) has published the Malaysia Transfer Pricing Guidelines for Intra-Group Loans (MFTIL), providing a comprehensive framework for determining whether financing transactions between associated persons comply with the arm’s length principle.
The guidelines No. 3/2026, published on 30 July 2026, outline how taxpayers should assess, price and document intra-group loan arrangements.
Arm’s length principle and transaction delineation
The guidelines state that the actual nature of a financial transaction must be determined based on its economic substance rather than its legal form or contractual label. Taxpayers are required to examine factors including risk control, functional contributions and the actual conduct of the parties when delineating financial transactions.
A central feature of the guidance is the distinction between debt and equity. The IRBM explains that a purported loan must be assessed to determine whether it represents a genuine loan or a contribution to equity capital. Among the factors to be considered are the existence of a fixed maturity date, voting rights and a legal obligation to repay the funds.
The guidance also provides for recharacterisation where a transaction is considered commercially irrational or lacks the characteristics of a genuine loan. In such cases, the Director General of Inland Revenue (DGIR) may disregard or recharacterise the arrangement, potentially resulting in the disallowance of interest deductions.
Assessing lenders, borrowers and creditworthiness
The MFTIL requires taxpayers to evaluate intra-group loans from both the lender’s and the borrower’s perspectives. This includes assessing the lender’s credit analysis of the borrower as well as whether the borrower sought financing that is commercially appropriate and cost-effective.
Creditworthiness assessments are expected to rely on recognised credit ratings, including those issued by agencies such as RAM Ratings, Moody’s and S&P, to evaluate default risk.
The guidelines also address the effect of group membership on borrowing costs. They recognise the concept of implicit support, under which a subsidiary may obtain more favourable financing terms simply because it belongs to a multinational enterprise (MNE) group. According to the guidance, this inherent benefit generally does not require a transfer pricing adjustment.
Transfer pricing methods
The guidelines outline several approaches for determining arm’s length interest rates.
The Comparable Uncontrolled Price (CUP) Method is identified as the preferred method where reliable market data for comparable loans is available.
Where appropriate, taxpayers may instead apply the Cost of Funds Method, which calculates an arm’s length rate by combining the lender’s borrowing cost with an appropriate risk premium and profit margin. The guidance notes that this method is particularly relevant for intermediary entities that on-lend funds within a corporate group.
To reduce compliance costs, the IRBM has also introduced a simplified method for eligible taxpayers. Under this approach, taxpayers may apply designated interest rates published by Bank Negara Malaysia (BNM), specifically the Deposit Rate or the Average Lending Rate (ALR), provided the aggregate amount of intra-group loans does not exceed MYR 50 million.
Documentation and compliance obligations
The MFTIL requires taxpayers to maintain Contemporaneous Transfer Pricing Documentation (CTPD) to demonstrate that interest rates applied to intra-group loans comply with the arm’s length principle. Supporting documentation should include loan agreements, credit assessments and other relevant evidence.
The guidance requires taxpayers to retain all relevant records, including CTPD, for seven years. Although the documentation does not have to be submitted with the tax return, it must be provided within 14 days of a written request from the DGIR.
The guidelines also address Section 140B of the Income Tax Act 1967, which contains provisions governing loans or advances made to directors.
The publication of the MFTIL establishes a dedicated framework for evaluating related-party financing arrangements in Malaysia, setting out the IRBM’s expectations on transaction characterisation, transfer pricing methodologies and supporting documentation for intra-group loans.
